Dividend tax linked to Income tax question.

**malvolio** · 16 October 2006, 23:34

Have you actually learned anything from your study of the recommended guides? Because I think you are either winding us up, or haven't understood any of it...

Stay permie, you are not capable of hacking it by yourself.

**ChimpMaster** · 17 October 2006, 09:56

Chris, in your situation it's best to get an accountant, at least for the first year. Or use a firm of accountants that are linked to an umbrella... there are some on this forum.

From what I can gather from your message, you were permanent most of this financial year (FY) and have recently started contracting. So your permie earnings have exceeded £38k this year, throwing you into the 40% bracket.

Briefly... when you now go with any umbrella, they will force you to take dividends every so often (monthly etc). For any dividends received this FY, the umbrella will pay basic rate tax only. So at the end of the FY you will need to complete a Self Assessment tax return and declare all of your earnings (including dividends). The Inland Revenue will then tell you how much more tax you owe them, which will average out to approx. 25% on the dividends above the £38k income theshold.

But like I said, get an accountant, or ask the umbrella about the declaration of dividends on the tax return. Giant can accomodate you as well as any other umbrella.

**malvolio** · 17 October 2006, 11:24

Except Umbrellas don't pay dividends. Composites pay dividends. Confusing, isn't it...

The basic advice is good though. Go with an umbrella, not a composite - Parasol, ContractorUmbrella or PCG's QU - until you know what you're doing and until the end of the tax year. That way you can learn the ropes safely, not fall foul of the taxman and not get ripped off. OK you'll perhaps be paying "normal" tax for a while, but that's better than getting stuffed with a penalty becuse you don't know the rules. And you'll still be earning more than you were.

But make sure you do learn the rules - contracting is a lot more complicated than it appears until you do.

**christhedon** · 17 October 2006, 11:47

I spent a little while looking into this IR35 thing. I was thinking of not drawing any dividends until next year, so I don't have to pay higher rate dividend tax. I was sure that an umbrella wouldn't provide the above because they are standard PAYE. I felt pretty sure composites wouldn't offer this because they are paying out money every month. Possibly a managed LTD company would do it, but I'm not aware of one that would. That leaves limited.

However this is all based on the assumption that income bracket significantly affect dividend tax.

Another thing I'm not clear on is the bandings for dividend tax and how exactly it is affected by income tax.

I wanted to get some clarity around my assumption.

**malvolio** · 17 October 2006, 13:02

OK, inside IR35 dividends don't apply (well, they might, but only under very odd circumstances and can be ignored for now). In effect, take your gross, take off 5% from that, that amount is then taxed as everyday PAYE/NICs salary so you may as well take it out as such. (There are a few minor allowable expenses, but let's not confuse things).

If, however, you can take dividends, these come out of net profits so you've already paid 19% corporation tax on that money. Under the no-double-taxation rule (and with a little mathematical sleight of hand), no more tax is due if you are a standard rate taxpayer. If you are on higher rate, though, you will be asked for a further 21% to make up the difference (in effect: the sums are actually a bit more tangled, needless to say, and involve dividend tax credits and so on, so you draw the dividend net of tax then declare the gross amount in your SA form at tax year end). No NICs are due on dividends (which is what IR35 is all about, incidentally)

You will also be expected to pay the same amount of additional tax next year in advance in two halves on account which will be offset againt next year's bill, on the assumption you will be earning the same forever more.

Simple really, isn't it? Sure you don't want an accountant?

**ChimpMaster** · 17 October 2006, 13:37

And just to add....

Yes the only way you can retain earned income until next FY is via your own Ltd Co. It's a very common way of operating -- pay yourself up to the 40% tax limit each FY, and retain the rest in the Ltd Co.

The retained funds can then be withdrawn when you have a lean year. Or after a couple of years (better if longer) you can choose to wind up the Ltd Co and take the funds out with the benefit of taper relief.

**ASB** · 17 October 2006, 13:42

Originally posted by TazMaN

And just to add....

Yes the only way you can retain earned income until next FY is via your own Ltd Co. It's a very common way of operating -- pay yourself up to the 40% tax limit each FY, and retain the rest in the Ltd Co.

The retained funds can then be withdrawn when you have a lean year. Or after a couple of years (better if longer) you can choose to wind up the Ltd Co and take the funds out with the benefit of taper relief.

Doesn't want to be too long. If one shareholder once you have more than about 36k retained the CGT becomes an issue on wind up.

**ChimpMaster** · 17 October 2006, 13:44

Originally posted by ASB

Doesn't want to be too long. If one shareholder once you have more than about 36k retained the CGT becomes an issue on wind up.

Yes CGT is the tax that becomes payable but at a rate that is reduced by taper relief. The amount of relief increases with number of years that the amount is retained (up to a limit?).

I have heard that there can be issues in withdrawing huge amounts, for example trying to close the Co down when there is something like 200k to withdraw!

**malvolio** · 17 October 2006, 13:54

Let's not get complicated, here - the OP is struggling as it is...

Dividend tax linked to Income tax question.